Basic materials starting to outperform market

MichaelKahn

NEW YORK (MarketWatch) — Since the financial crisis hit four years ago, many traditional themes and tendencies within the stock market have been a bit funky. But most technical studies do still work if we give them a little extra rope.

Omar Aguilar, chief investment officer
at Charles Schwab, tells MarketWatch's Jonathan Burton investors are
transitioning to a search for growth from a flight to quality.

The natural ebb and flow of sectors as they anticipate the business cycle seems to be one that still offers investors good insights. And right now, I see a shift in the marketplace away from health care and towards basic materials. Drug and health-insurance stocks are fading relative to the market while mining, steel and chemicals stocks are coming into favor.

Relative performance analysis is simply a comparison between two stocks, groups or markets. For example, the Select Sector SPDR-Health Care
XLV, -0.16%
exchange-traded fund (ETF) can rally, but if it is not rising as fast as the Standard & Poor’s 500 we say it is lagging, or underperforming.

Chart watchers use this information along with traditional technical metrics such as resistance and momentum to decide if they want to cut back on their health care related holdings and move money elsewhere.

Conversely, as January ended, the Select Sector SPDR-Materials
XLB, -0.44%
ETF started to lead, or outperform, the market (see Chart1). At least some of the money leaving health care and other sectors found its way here.

This shift in relative performance is only a warning, albeit a positive one. A sector can outperform the market by falling less because both are in falling trends. Clearly, that does not help investors make money; just lose less.

But as can be seen in the chart, the basic materials ETF moved above both horizontal resistance and its 200-day moving average. It is not the strongest of bull trends but that is not the point. This chart can alert investors of a newly emerging sector in which to scan for attractive stocks.

The ETF itself contains stocks from chemicals, metals and mining and forest and paper products. Chemicals make up 59% of its weight and covers such diverse areas as plastics, fertilizer and industrial gases. Mining makes up 29% and covers gold, copper and aluminum.

ETFs represent only a slice of a sector and their composition depends on who selected component stocks. In this case, steel makes up a very small percentage of the ETF’s value.

But steel actually started to trend higher in September. Last month, many component stocks such as AK Steel
AKS, +0.00%
, US Steel
X, +1.29%
and Worthington Industries
WOR, -0.85%
moved above respective resistance levels.

But the biggest potential story within basic materials is gold and precious metals miners. With gold itself firming up last month and emerging from a technical pattern called a “triangle,” gold is poised to resume its long-term bull market. That is good news for shares of gold miners such as Goldcorp
GG, -1.38%
, which rallied sharply from the bottom of a one-year trading range last month.

Basic materials are now starting to outperform the market but again this is a relative term. If the market holds up then there are gains to be made in the sector. But if the market starts to fall they may struggle, albeit likely not as much as other sectors.

Michael
Kahn

Michael Kahn, a chartered market technician (CMT), is a columnist for MarketWatch as well as Barrons.com, where he writes the “Getting Technical” column. He is the author of three books on charting, contributes to several trading and investing websites, and speaks at industry events.

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Michael
Kahn

Michael Kahn, a chartered market technician (CMT), is a columnist for MarketWatch as well as Barrons.com, where he writes the “Getting Technical” column. He is the author of three books on charting, contributes to several trading and investing websites, and speaks at industry events.

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